SEOUL, Nov 2 (Reuters) - SK Innovation, owner of South Korea’s top refiner SK Energy, said on Friday that market conditions are expected to be “favourable” in the fourth quarter on the back of firm demand.

Middle distillates such as diesel are expected to support overall demand for the fourth quarter, the company said in an earnings statement.

A week ago, S-Oil, South Korea’s third-biggest refiner, said seasonal demand for heating and tight regional supply were expected to help boost refining margins in the fourth quarter.

Oil refining margins have been volatile, with fuel oil and gasoil cracks soaring on tightening supply and higher demand for low-sulphur gasoil ahead of the implementation of stricter marine fuel regulation by the International Maritime Organization (IMO). By contrast, a supply glut has weakened gasoline cracks.

“Current weakness in gasoline cracks is due to increased export volumes from China and impact of non-peak season ... but further falls are expected to be limited,” Kang Dong-soo, head of corporate planning office at SK Energy, said in a call with analysts.

Demand from India and China, as well as lower inventories, is expected to keep gasoil cracks firm, he said.

SK Innovation’s July-September operating profit fell 12.7 percent to 836 billion won ($741 million) due to a weaker Korean won and lower inventory-related gains, down from 958 billion won a year earlier, the statement said.

The company announced last year it would build a 40,000 barrels per day (bpd) Vacuum Residue Desulfurisation (VRDS) by 2020 in a bid to produce clear fuels ahead of tougher IMO sulphur regulations from 2020.

Kang said construction of the unit was 27 percent complete, and it was expected to generate an annual operating profit of up to 300 billion won once it comes online.

SK Innovation, which has a total refining capacity of 1.115 million barrels per day (bpd) in Ulsan and Incheon, ran at 92 percent capacity on average in the second quarter, slightly down from 94 percent during the same period a year earlier, the statement said. ($1 = 1,128.1600 won) (Reporting By Jane Chung; Editing by Michael Perry and Richard Pullin)